Monday 4 May 2020
Emissions from global energy consumption are set to fall by 8% this year, the largest decline in the modern era. The estimate comes from IEA Paris, which sees emissions pulling back to 30.45 Gt, a level last seen in 2010. Separately, the IEA also forecast that consumption of every energy source will decline this year—except for wind and solar. That shouldn’t be too surprising. 115 GW of new solar capacity was installed last year—a massive volume of clean power that will be available in 2020. For comparison, 95 GW of solar were installed in 2018.
While few, if any, expect the scale of the emissions decline to be repeated or sustained, we should bear in mind that emissions growth has slowed appreciably in recent years. In contrast to the first decade of the new millenium, when emissions grew 31.5% from 23.24 Gt in 2000 to 30.57 Gt in 2010, the past 9 years saw emissions grow 8.3%, from 30.57 Gt in 2010 to 33.1 Gt in 2019. These two data points tell an important story. The first decade was dominated by China’s supersized demand growth for coal and oil. The second decade saw the peak of global coal demand (2013) and the pronounced slowdown of global oil growth. Emissions were flat in 2019 compared to 2018 for example. Now that coal growth is well behind us, and oil growth has likely entered a plateau (leaving aside the anomaly of 2020) all uncertainty in the future pathway of global emissions should properly focus on the big, unanswered question: when will oil demand enter permanent decline?
The S&P 500 rose above 2900 last week—a pivotal level the index has visited several times in the past two years—and then promptly turned back down. The stock market faces the same crucial question about the pandemic’s duration that currently animates many domains of expertise, from epidemiology and politics to monetary policy. In a recent New York Times profile of journalist Laurie Garrett, whose coverage of Ebola in Zaire earned her a Pulitzer in 1996, she offered a general framing to this question: “I’ve been telling everybody that my event horizon is about 36 months, and that’s my best-case scenario.”
If the global shut-down has given you ample time to read voraciously, to absorb more information than usual in everything from epidemiology to political economy, then you too may find yourself coming to a similar conclusion. Timelines for vaccine development and distribution typically run at 18-24 months at best; the lagged effects on the labor market from business closures are similar in duration; and outcomes on interest rates and monetary policy can be even longer lasting. Over the next month or two, it is also likely we will see how reopening actually looks in practice. It’s not particularly encouraging. The pandemic therefore is likely to act as a rolling depressant, and the acute phase marked by this Spring’s global shock will eventually give way to a chronic phase, in which all the ripples set in motion now take time to play out. It is very tragic and scary. And wishing it away will not solve the problem.
The Gregor Letter is going to offer, henceforth, a simple base case for the pandemic which will update as we go along. Laurie Garrett’s 36 month timeframe aligns quite well with the experience of past crises from a macroeconomic perspective, for example. While the current event did not begin as a financial crisis, it’s duration and secondary effects are likely to play out like one. Accordingly, a plausible base case is a recession whose effects are rather painful and difficult for at least the next two years, with some moderate hope starting to appear in 2022. The stock market is going to have an extremely difficult time trying to discount the oscillations as the pandemic’s second and third waves roll through the economy, with a bunch of uneven effects on various sectors. The base case sees global trade and consumption enduringly suppressed, therefore, as though the 2008-2009 experience were to carry on for two to three years. Moreover, while monetary policy can indeed put a floor under asset prices, such policy cannot by itself prevent further acute phases of liquidation, in which institutions and all market participants will at times need to raise cash. More sobering is that the base case for a painful recession is the best case scenario. The common fear is that we will have a depression. But monetary and fiscal actions will probably stave off such an outcome, and the reflexive urge to make comparisons with the 1930’s. Remember: the liquidationists lost that argument, and Ben Bernanke’s famous declaration “never again” is to be taken seriously.
Accordingly, conditions will be difficult, weird, and uncertain for at least two more years. During this time, as in past crises, the foundations of better things to come will form. Some good things will happen, amidst the suffering. Certain economic readings will bottom, but it won’t matter. For example, I see many professionals declaring that activity can’t get much worse in certain sectors like air travel, or gasoline consumption. That may be true. But the duration of the pandemic will dominate the scene. Bottoms matter to V recoveries, less so to ongoing, chronic conditions. To conclude, the world will have to endure 36 months of difficulty, and somewhere in the middle of that 36 months perhaps we will plant a flag; one that eventually becomes the technical end of the recession. But no one is going to draw much succor from that flag-planting exercise. Starting in the Spring of 2022, the good things we’ve done, the right investments we still managed to make, and the better policies we enacted, will then start to take control, and will guide the pathway forward.
Royal Dutch Shell cut its dividend for the first time in 80 years. The European supermajor has done a good job the past 15 years transitioning away from oil, and re-weighting towards natural gas. But it’s likely a mistake to engage in this half measure, and not simply take the dividend to zero. RDS and other supermajors need to think more deeply about diverting all new investments to the clean energy sector. That’s where all the action will take place, despite the long tail of oil and gas dependency. Former Financial Times journalist Ed Crooks, now with Wood Mackenzie, has written a good overview of the RDS dividend cut and quite appropriately contrasts the supermajor’s performance with the offshore wind giant, Orstead. Indeed, Orstead’s share price has more than doubled since it floated (pun intended), in 2016.
Tourism, a lever for recovery in the last crisis, is more likely to become a permanent drag this time around. The entire West Coast of the US historically sees major inward bound tourism in the summertime, and other global regions like Asia will also be hard hit. The European economy is particularly reliant on cross-border tourism and sadly, tourism is likely to be one of the sectors to last emerge from this ongoing recession. According to a long piece on this subject in the Guardian this weekend, the European Commission estimates EU hotels and restaurants will lose half their income this year. Southern European nations like Greece, Spain, and Portugal actually derive large portions of their GDP from tourism. So again, while a pandemic is not a financial crisis categorically, the duration of this crisis will start to play out much like the last, with tensions rising again within the European Union on how best to provide fiscal support over such a varied macroeconomic landscape.
The Trump Administration, now whittled down to a Hail Mary as it looks ahead to the November election, has clearly decided upon a strategy to blame and demonize China. But given mounting unemployment, and the overall crumbling of the Trump edifice, the initiative is unlikely to work. It would be counterintuitive to say the least, for example, to mount on top of the current crisis a resurrection of trade war tensions with China—but I suppose one could try. Meanwhile, polling in key senate races and also national level head-to-heads between Biden and Trump continue to trend away from the President. A reminder to readers outside the United States: if the Democrats in addition to winning the Presidency gain just net 3 senate seats—taking the upper house from a 47-53 seat configuration to a 50-50 Democratic-Republican split—the Democrats could effectively control the Senate agenda as the Democratic Vice President would then be the 51st and deciding seat/vote. Key Senate races to watch for Democratic pick-up opportunities are Montana, Arizona, Colorado, Maine, and South Carolina. And, to a much lesser extent, Iowa and Georgia. Given that we are now six months from election day, the stock market will soon (if not immediately) have a new factor which it must try and discount. Not an easy task.
The US savings rate soared by 13% in March in a chilling reminder of how sticky recessions can become, without robust policy action. The increase was the highest in 39 years. Please see the 30 March issue of The Gregor Letter if you have not done so already, for the pandemic primer note, and commentary on pandemic research from UC Davis. One of the authors’ key findings: pandemics fundamentally alter savings behavior
The battery storage market is poised for takeoff. Southern California Edison announced plans to procure 770 MW of storage, to be completed by late summer 2021. According to LA Times journalist Sammy Roth, the size of the contracts exceed the volume of the entire 2019 storage market. In the same way wind and solar (along with natural gas) have feasted on the demise of coal, grid-scale battery storage is poised to further cannibalize legacy power generation as it will time-shift renewable supply, and suppress further the need for new fossil fuel capacity. As detailed in a long piece I wrote for PV Magazine late last year, storage is increasingly being paired with new wind and solar projects for the most straightforward of reasons: as wind and solar costs crash further, the addition of “more expensive” storage capacity is increasingly affordable. Because storage enables the owner to both enhance the ROI of existing wind and solar capacity, while additionally acting as a market maker, we might say in the future: he who owns the storage makes the rules.
This week marks the return of The Gregor Letter to its regular publishing schedule: every other Monday. The next issue will arrive therefore on 18 May.
The Oil Fall supplement and update will arrive in early June and if you have already purchased your copy of Oil Fall the update will automatically arrive to you for free through a notification from Gumroad. Advance note: the price of Oil Fall will go up after the update is released, so again, if you have not read the title you might want to make your purchase rather soon.
In March, I was delighted to participate in an online oil conference hosted by London based Southbank Research. I was particularly pleased to join in with Mark Lewis from BNP Paribas, Colin McKerracher from Bloomberg New Energy Finance (NEF), and Michael Liebreich (who actually started NEF many years ago), as well as Ramez Naam, author and renewables analyst. Unsurprisingly, I know all these smart people and am lucky to benefit from their views. I believe you can watch the series of videos for free, by registering here.
—Gregor Macdonald, editor of The Gregor Letter, and Gregor.us
Photos: 1. Greeting card detail of painting, Battersea Power Station. 2. Mt. Hood and the Columbia River at Portland Oregon, 2017, Gregor Macdonald. 3. USA map graphic. 4. Bankside architecture, Southwark, London, 2020, Gregor Macdonald.
The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.